DBRS Confirms CapOne Following Announcement of ING Direct USA Acquisition-Sr. at BBB (high), Stable

DBRS Inc. (DBRS) has today confirmed the ratings for Capital One Financial Corporation, including its Issuer & Senior Debt rating of BBB (high), and its principal subsidiaries, including Capital One Bank, (collectively Capital One or the Company). The trend on all ratings remains Stable. Today’s ratings confirmation follows the Company’s announcement that it has agreed to purchase ING Direct USA from ING Groep N.V. for approximately $9.0 billion in cash and stock.

In confirming the ratings, DBRS recognizes the long-term benefits of the acquisition, while acknowledging the short-term risks in the transaction. DBRS sees the acquisition as strengthening Capital One’s already solid funding and liquidity profile. ING Direct USA’s $80 billion of deposits will enlarge Capital One’s already substantial retail deposit base. Upon closing, Capital One will become the fifth largest depository in the United States with approximately $200 billion in deposits. Moreover, DBRS sees the acquisition as further strengthening the overall sound franchise of Capital One. In acquiring ING Direct USA, Capital One is gaining the leading direct-banking franchise in the U.S., which DBRS sees as a strategic fit that complements Capital One’s national consumer lending business and local bank branch business. Furthermore, DBRS views the acquisition as significantly enhancing Capital One’s already solid foundation in the online banking market which continues to become an increasingly important banking channel for consumers.

In confirming the rating DBRS is also mindful of the short-term risks of the transaction. Capital One intends to finance the transaction through cash and stock. The transaction will result in an increase in leverage and weakening of capital metrics at the time of closing. It will also significantly increase Capital One’s exposure to U.S. residential mortgages, an asset class for which the Company has traditionally had a modest appetite. The Company will acquire ING Direct USA’s $40.7 billion residential mortgage book. Further, the transaction adds sizeable market risk, given that it includes a $29.4 billion securities portfolio, of which 63% are mortgage-related securities. DBRS remains cautious regarding potential losses on these assets given the still unsettled U.S. housing market and weakness in the U.S. economic recovery. These risks are somewhat mitigated, however, by purchase accounting marks to be taken at closing. Furthermore, as with most acquisitions, there are significant integration challenges in the transaction including Capital One’s ability to optimize ING Direct USA’s franchise and retain ING Direct USA’s seven million customers. However, given the track record of Capital One’s management in successfully integrating previous acquisitions, DBRS believes that these risks will be well-managed.

Going forward, DBRS will look to Capital One’s ability to capture the benefits of the acquisition, while managing the aforementioned risks in an uncertain operating environment. To this end, DBRS will monitor Capital One’s ability to retain ING Direct USA deposits and optimize the enlarged retail deposit base to drive revenue growth and profitability.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please refer to the linking document below.